1. Which one of the following statements is correct?
To maximize the value of a firm you need to maximize the firm’s WACC.
A Chapter 7 bankruptcy is a legal process for reorganizing a firm.
Investors can use homemade leverage to offset firm leverage.
To maximize the value of a firm you need to borrow as much as you can.
2. Different borrowers have different risks of bankruptcy, and bankruptcy is costly to lenders. Therefore, lenders charge higher rates to borrowers judged to be more at risk of going bankrupt
True
False
3. A firm has 100,000 shares of stock outstanding. The firm is considering borrowing $1.3 million at 7.5% interest and using the loan proceeds to repurchase 20,000 shares of stock. What is the value of the firm? Ignore taxes.
$5.20 million
$5.98 million
$6.50 million
$7.25 million